The Reserve Bank of India on Wednesday permitted banks to give exporters, with a minimum of three years satisfactory track record, long-term export advance up to a maximum period of 10 years.

The exporters can receive export advance from banks (authorised to deal in foreign exchange or Authorised Dealer Bank) only for execution of long-term supply contracts for export of goods, subject to conditions.

The conditions specified by the central bank include firm irrevocable supply orders and company having capacity, systems and processes in place to ensure that the orders over the duration of the said tenure can actually be executed.

The RBI said the contract with the overseas party/buyer should be vetted and clearly specify the nature, amount and delivery timelines of products over the years and penalty in case of non-performance or contract cancellation. Product pricing should be in consonance with prevailing international prices.

The facility (of receiving long-term export advance) is to be provided only to those entities that have not come under the adverse notice of the Enforcement Directorate or any such regulatory agency or have not been caution listed.

The AD bank is required to duly evaluate and monitor the progress made by the exporter on utilisation of the advance and submit an Annual Progress Report to the RBI. Receipt of such advance of $100 million or more has to be immediately reported to the RBI.

Further, double financing for working capital for execution of export orders should be avoided.

The RBI said such advances should be adjusted through future exports. The rate of interest payable, if any, should not exceed the benchmark London Interbank Offered Rate plus 200 basis points. The documents (export) should be routed through one AD bank only.

Due diligence

The AD bank should ensure compliance with anti-money laundering/ Know-Your-Customer guidelines and also undertake due diligence for the overseas buyer so as to ensure it has good standing/ sound track record.

The RBI said such export advances will not be permitted to be used to liquidate rupee loans, which are classified as non-performing assets according to the Reserve Bank of India’s asset classification norms.

In case AD bank is required to issue bank guarantee (BG) / Stand-by Letter of Credit (SBLC) for export performance, the RBI has issued guidelines it needs to adhere to.

A bank guarantee ensures that the liabilities of a debtor will be met. An SBLC is a guarantee of payment issued by a bank to pay a sum of money to a beneficiary on behalf of their customer if the customer does not pay the beneficiary.

Issuance of BG/SBLC, being a non-funded exposure, should be rigorously evaluated as any other credit proposal keeping in view, among others, prudential requirements based on board approved policy. Such facility can be extended only for guaranteeing export per- formance.

BG/SBLC may be issued for a term not exceeding two years at a time and further rollover of not more than two years at a time may be allowed subject to satisfaction with relative export performance according to the contract.

BG/SBLC should cover only the advance on reducing balance basis. BG/SBLC issued from India in favour of overseas buyer should not be discounted by the overseas branch/ subsidiary of the bank in India.